Taxation of Long Term Care Premiums and Benefits

Deductibility of Premiums Paid by an Individual

Premiums paid by individuals (as opposed to businesses) on qualified long-term care insurance policies are treated as a medical expense by the IRS. As such, they are only deductible if you itemize ... and then only to the extent your total annual medical expenses exceed 7.5% of your adjusted gross income (AGI). Furthermore, the maximum amount of long-term care premiums you may count as medical expense is capped according to your age as follows:

Age Amount

41 through 50     $530

51 through 60     $1,060

61 through 70     $2,830

71 and older      $3,530

* 2006 limits. Annually adjusted for inflation.

Deductibility of Premiums Paid by a Sole Proprietorship¹

Eligible long term care premiums paid by Sole Proprietorships are deductible. The owner, however, must pay self employment tax on the value of the benefits received.

¹ includes single member LLCs that have not filed to be taxed as a corporation

Deductibility of Premiums Paid by a C-corporation²

C-corporations may pay for eligible long-term care insurance coverage for its employees, owner and non-owner, and fully deduct the cost. Employees (owner and non-owner) don't have to count the benefits as income.

² includes LLCs that elect to be taxed as a C-corporation

Deductibility of Premiums paid by an S-corporation³

S-corporation may pay the premiums on long-term care insurance for its employees and deduct the cost. Employees don't have to include the benefits as taxable income (technically, shareholders with ownership of 2% or more must book the benefit as income but they may then deduct the benefit "above the line" on their individual tax return).

³ includes LLCs that elect to be taxed as an S-corporation

Partnership⁴

Same as S-corporation, above.

⁴ including Multi-member LLCs taxes not taxed a corp.

Taxation of Benefits Received by Individuals

Benefits received on long-term care insurance policies are not taxable as income to the recipient ... as long as the payments don't exceed the actual cost of the care provided (subject to maximums set annually by the IRS - $250/day in 2005).

Note: A "qualified long-term care insurance contract" is one that:

a. provides insurance coverage only for qualified long-term care services;

b. does not pay or reimburse expenses to the extent that the expenses are reimbursable under Medicare. This requirement does not apply to expenses which are reimbursable under Social Security only as a secondary payor;

c. is guaranteed renewable;

d. does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan, or borrowed; and

e. provides that all refunds of premiums (other than refunds on the death of the insured or on a complete surrender or cancellation of the contract, which cannot exceed the aggregate premiums paid under the contract ) and policyholder dividends or similar amounts are to be applied as a reduction of future premiums or to increase future benefits.